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CBO projects U.S. budget deficit to reach $1.5 trillion in 2011, highest ever

By Lori Montgomery
Washington Post Staff Writer
Thursday, January 27, 2011; 3:43 AM

The still-fragile economy and fresh tax cuts approved by Congress last month will drive the federal deficit to nearly $1.5 trillion this year, the biggest budget gap in U.S. history, congressional budget analysts said Wednesday.

The grim forecast from the nonpartisan Congressional Budget Office came hours after President Obama called in his State of the Union address for Republicans and Democrats to work together to rein in record deficits that are pushing the national debt into uncharted territory. At $1.5 trillion, the deficit would equal 9.8 percent of the economy, the CBO said, making it one of the largest by that measure since the end of World War II.

Lawmakers scrambled Wednesday to respond to the darkening budget picture, with Republicans pressing their call for sharp and immediate cuts in domestic spending. Twenty-one Senate Republicans, meanwhile, unveiled a plan to amend the U.S. Constitution to require balanced budgets, a top priority of the tea party movement.

Democrats resisted both initiatives, arguing that amending the Constitution, a lengthy process that requires a vote in all 50 state legislatures, would do little to address the current problem. They dismissed as "drastic" a proposal by House Republicans to slash $100 billion from the current budget, arguing that cuts of that magnitude would endanger a million jobs on public- and private-sector payrolls at a time when the unemployment rate already stands at 9.4 percent.

"We have to cut government, but Republicans are going at this with meat axe when what is needed is a sharp, precise scalpel," said Sen. Charles Schumer (D-N.Y.).

Bipartisan talks

As the two sides bickered in dueling news conferences, a small band of senators from both parties was trying to heed Obama's call, with talks aimed at advancing a bipartisan blueprint for deficit reduction developed last month by Obama's fiscal commission. That blueprint goes far beyond cuts in domestic programs to tackle the biggest and fastest-growing parts of the federal budget, including cherished tax breaks such as the home mortgage interest deduction and popular entitlement programs such as Social Security and Medicare.

The effort includes four senators who sat on the deficit commission and rank as some of the most influential voices in their parties on budget matters, including Sens. Tom Coburn (R-Okla.); Mike Crapo (R-Idaho); Kent Conrad (D-N.D.), chairman of the Senate Budget Committee; and Richard J. Durbin (D-Ill.).

Conrad said discussions are focused on two tracks: a move to present the commission's recommendations as a fully drafted bill for a Senate vote and an alternative path that could incorporate the panel's ideas into the annual budget process or into legislation needed to raise the legal limit on government borrowing.

The group had hoped to meet for dinner Wednesday at the Alexandria home of Sen. Mark R. Warner (D-Va.), but the gathering was cancelled because of snow.

The commission's recommendations are "very good," said Durbin, the No. 2 Democratic leader in the Senate. "We want to work with other members to see if we can come to a bipartisan approach in the Senate to the budget."

Conrad said the new deficit numbers released Wednesday in the CBO's twice-yearly budget outlook served "as another wake-up call" and added to the urgency around the group's work. After two years of record deficits hovering around $1.4 trillion, policymakers had hoped that an improving economy would begin to narrow the gap between spending and revenues.

Instead, the CBO forecast that the budget gap is widening again and is on track to remain above $1 trillion in 2012, the fourth year in a row.

In a briefing for reporters, CBO director Douglas Elmendorf said the primary reason for the reversal is the tax package Obama and congressional Republicans negotiated in December. That measure extended the George W. Bush-era tax cuts through 2012, created an unprecedented new investment credit for businesses and cut payroll taxes for every American worker.

The bill also extended emergency unemployment benefits through the end of December, but the tax cuts account for the bulk of the bill's cost. According to CBO estimates, the measure will reduce revenues by more than $350 billion this year, accounting for virtually the entire increase in the deficit forecast since the CBO's last projection in August.

The tax package, combined with the effects of the recession and massive spending to boost the economy, has dramatically driven up the national debt, which is the accumulation of deficits incurred throughout the nation's history.

The amount the nation owes public investors, including nations such as China, has risen from about 40 percent of the economy in 2008 to nearly 70 percent this year, the CBO said.

Without "significant" changes in spending patterns, tax policy or both, Elmendorf said, the nation will probably have to borrow an additional $12 trillion through 2021, pushing the total debt held by outside investors to nearly 100 percent of the economy and leaving the country deeper in debt than at any time since 1946.

Call for amendment

In response to the gloomy forecast, Republicans led by Sen. Orrin G. Hatch (R-Utah), the senior Republican on the Senate Finance Committee, and Sen. John Cornyn (R-Tex.) called for a balanced-budget amendment that would cap federal spending at 20 percent of the economy, significantly lower than the current 25 percent of gross domestic product. It would also prohibit tax increases unless approved by two-thirds of lawmakers in both the House and Senate.

Meanwhile, in the House, a group of Republicans anticipated a looming fight over the legal limit on government borrowing by introducing legislation that they said would help prevent a government default. Members of the Republican Study Committee, who oppose raising the legal cap on borrowing, said the measure would direct Treasury Secretary Timothy F. Geithner to pay principal and interest to the nation's creditors before making any other government payments.

"A pitiful scare tactic already being used by the Treasury secretary in the debt ceiling debate is the threat of allowing the federal government to default on its obligations," said Rep. Jim Jordan (R-Ohio), the committee's chairman. "This bill will take Secretary Geithner's disastrous scenario completely off the table."

Democrats dismissed the legislation as a terrible idea that would force the Treasury to "pay China first" while ignoring Americans who need, for example, Social Security checks. Elmendorf said paying principal and interest on the debt would not necessarily protect the nation's financial reputation.

"It is possible for the Treasury to decide which obligations would not be honored if there's not enough money to honor all of them," he said. "But that is still default."

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